History Of Oil Speculation
Did you ever wonder what would happen the next day to a market that was a BIG MOVER, like the one last Friday? Well, today was a perfect example. All the big movers (except Gold) pulled back a little from their big move. They didn’t move back all the way, just a little ways. Gold only lost $1 of its $21 gain last Friday.
In the news today….
Pending sale of existing homes increased (big surprise to everyone) 6.3% over the past month. The majority of people thought we would have another decrease. Apparently, bargain hunters are showing up in the market place.
Lehman Bros lost $3B (or $5/share) this past quarter, and is the first loss they have ever reported. This loss ate up all the earnings from the past 8 years. How could that be – given that all the other financial institutions have been reporting losses regularly over the past 2 quarters? Easy answer – they lied. The CEO of Lehman Bros has continued to state that “I don’t need capital,” BUT he just raised $6B in capital by selling shares at the fire sale price of $28/share, and diluted existing shareholders by 30%. What a nice guy. This CEO should be summarily shown the door.
Oh, by the way, Lehman Bros’ rating got cut today too. Couldn’t happen to a better company.
Dinner Conversation Tonight…..
I’ve been on a rant about oil prices, and I’d like to share with you some insight I gained this last weekend on what makes up oil prices, and how we got into this mess in the first place.
Oil price is moved by three major items – supply/demand curve, the value of the dollar, and speculation. The latest information regarding these 3 major items is:
- Supply/demand is in balance – so it isn’t moving the market right now.
- The value of the dollar is stable over the past month, and the dollar has strengthened over past oil price highs. This means that the dollar shouldn’t be moving the market – from a rational viewpoint – and the market is irrational under the best of times.
- Speculation is rampant, and that’s the point of this write up. Only speculation has been moving the market this past week, especially last Friday when it gained over $10/barrel.
How did this speculation get started? Well, back in 1999, our beloved Congress (you can tell how much I love them if you know I’m being sarcastic here) passed a bill introduced by Senator Graham and the bill was “modified” in the black of the night after the vote, and was signed by the President. It became law. It contained such a major change (the one introduced at night) that allowed Enron to become “Enron.” Inside of this bill was the “Enron loophole.” This loophole changed the way speculation was done on energy from that point in time on. Prior to that bill, speculation was controlled by US agencies because speculation could not take place without a justification of its need and extent. After the bill, no justification was required, and in fact, if the public thought that speculation would “hurt” them, the public had to prove it – and this is a lengthy, expensive process.
In addition, speculation in the US of US products (think Texas intermediate crude oil) had limits placed on it. Things like trading limits, margin limits, etc. However, another loophole has been put in place – a letter only (that could be repealed) - that allows non-US regulatory government bodies (think Dhubi) to use their own rules. Well, guess what, there are NO rules in those regulatory bodies, and more than 30% of US oil commodity contracts are traded outside of the US without US control. That means “our government” has consciously given up control of the US energy market place, and speculation is now driving the price.
It was predicted by a knowledgeable person that if this letter was repealed, then oil would drop somewhere between 25% and 50% in price.
This really makes me mad.
Here are today’s numbers:
Dow Jones 30 Industrial - 12,280 (up 71 points)
10 Year Treasury Bond - 3.99% (up 0.05%)
Euro - 1.56.41
Gold - $898 (down $1)
Oil - $134.35 (down $4.19)
Gasoline - $3.39 (down $0.15)
